TEAC concludes that awarded legal costs are only taxable for personal income tax purposes on the amount exceeding the actual cost of the lawsuit
Spain Tax Commentary
The tribunal has contradicted the reiterated interpretation of the Directorate-General for Taxes (DGT), in line with the view supported by the Ombudsman in his Recommendation of July 18, 2017.
It is inferable from several resolutions issued by the DGT that it has repeatedly been concluding that awarded legal costs must be characterized as a capital gain for personal income tax purposes. This gain, moreover, must be included in the general component of taxable income, because it was not obtained from transfers, which makes it taxable at the marginal rates.
Some tribunals (the Murcia Regional Economic-Administrative Tribunal, for example, in a decision on January 11, 2019 in claim 30/04351/2016/00/00, and Madrid High Court, in its judgments on December 2, 2019 in appeals 1089/2018 and 543/2017) reached the opposite conclusion arguing that there is a capital gain, but it must be calculated as the difference between awarded legal costs and the actual cost of the proceeding. This conclusion is based on the fact that awarded legal costs are simply an amount of indemnification having the purpose of covering the lawyer’s or court procedural representative’s fees needed to complete the lawsuit. This interpretation is in line with that supported by the Ombudsman in his Recommendation of July 18, 2017, rejected by the tax authorities.
TEAC has now concluded in a decision delivered on June 1, 2020 (in the appeal to a higher administrative body for a ruling on a point of law, under number 00-06582-2019) that awarded legal costs are a capital gain for the winner of the lawsuit; although the gain may be determined by subtracting the actual costs incurred in the lawsuit, to the extent of the legal costs received. Therefore, “if all the costs that may be characterized as legal costs are recovered, purely speaking no capital gain will have been obtained”.